It’s the Wages, Stupid

Welcomed by the left, and sure to be jeered or ignored by the right, it was full of plenty of old-time Democratic economic gospel and present-day center-left thought leadership. But it was a little bit light on the main factor that can combat the scourge of low wages and rising inequality: an appeal to the conscience and self-interest of businesses.

There was nothing new, or even objectionable, in the speech, which took a circuitous historical route to its subject. The U.S. has typically accepted greater inequality because we had a great deal of social and economic mobility. But the data behind that has clearly broken down, he argued. And that’s bad for America for a host of reasons. Countries with greater income inequality tend to have more frequent recession. Income inequality is bad for social cohesion, “not just because we tend to trust our institutions less but studies show we actually tend to trust each other less when there’s greater inequality.” And it’s bad for democracy.

The solution he offered is basically what has been the Democratic growth agenda for the last two decades. (It’s all there in Gene Sperling’s 2006 book, The Pro-Growth Progressive)That agenda includes “simplifying our corporate tax code,” more trade, smarter regulation, better skills and education, universal pre-school, more support for unions, bolstering retirement security, aid to urban areas and the unemployed, inter alia.

All those efforts are great, and many of them are likely to bear fruit in the long-term. But to a degree, Obama—and other people who focus on Washington—are missing the forest for the thicket of policies. The real problem is that companies in the U.S. do not pay enough, and that they have conditioned themselves (and their investors, and board, and employees, and politicians) not to raise wages even as their profits and cash holdings rise to record levels. Consider that corporate profits have soared from $1.2 trillion in 2009 to about $2 trillion this year, and that between the end of 2006 and mid-2013, corporate America’s cash holdings rose from $850 billion to $1.48 trillion. And yet the response to this remarkable turnaround has been effectively to reduce wages. Median household income in 2012 was below where it was in 1999, and has risen in only five of the last 12 years (PDF).

This is not a problem that can be corroded by a higher minimum wage, or stronger unions, or universal pre-K. Rather, it would require a wholesale change of heart among America’s business class. They’d have to start taking pride in offering higher wages each year—rather than, say, offering higher dividends or stock buybacks each year. They’ve have to make it part of their strategic mission to aspire to pay above the median, and thus help drag wages up.

Consider that corporate profits have soared from $1.2 trillion in 2009 to about $2 trillion this year.

In his speech, Obama cited the “extraordinary companies in America that provide decent wages, salaries and benefits, and training for their workers, and deliver a great product to consumers.” He name-checked software company SAS and outdoor retailer REI. There are some companies, he noted, that realize that “paying a decent wage actually helps their bottom line, reduces turnover. It means workers have more money to spend, to save, maybe eventually start a business of their own.”

That’s true. And companies like SAS, REI, and Costco should be applauded. Unfortunately, many of America’s largest employers—including Walmart and McDonald’s—have made paying the lowest possible wages a bedrock component of their business model. To be sure, that business model—just like the American economic model—is starting to creak under the weight of its own contradictions. (Walmart always wonders why its customers, who occupy the lower ends of the income ladder, never seem to have enough money to spend at Walmart stores.) And yet the executives fail to see the connection between the low wages they pay and the low consuming power of their customers.

This pernicious groupthink—that wages for workers and managers should be held to the lowest possible level, that the C-suite is the only place in which annual raises are an entitlement—is a far greater obstacle to economic equality than the Republican House of Representatives. And I’m not sure what President Obama can do or say to reach them. CEOs, after all, are not his natural constituency.

But CEOs do tend to listen to one another. So perhaps he could put together a group of highly successful business owners, managers, and executives who grasp the connection between good wages and prosperity, and then send them to bear witness and evangelize at Davos, the Business Roundtable, and Augusta National. Costco founder Jim Sinegal, who spoke at the Democratic convention last year, would be a natural leader of Centimillionaires for Higher Wages.